As Subway grew, franchisees paid
Some who lost out blame bullying, nitpicky managers
Manoj Tripathi couldn’t shake the feeling that someone had a vendetta against his Subway sandwich shop. A franchisee for nearly two decades, he had done everything he could to keep his restaurant, in an Orinda strip mall, in perfect condition. But lately it seemed like someone was out to get him.
It was the middle of 2017, and inspectors sent by Subway’s regional manager were finding a new problem to cite each month: a handprint on the glass door, the wrong brand of bathroom soap, cucumber slices that were too thick, he said. They seemed to be little things, but with each writeup, Tripathi’s grip on his store weakened. If he racked up enough infractions, Subway could terminate his contract and take control of the business.
When inspector Rebecca Husler arrived one day that September, Tripathi thought his restaurant was pristine. Then he noticed that a single light fixture needed a new bulb. Tripathi rushed out to buy a replacement, but by the time he returned, Husler had marked it as a violation. A year later, just as he feared, he lost the Subway.
Tripathi wasn’t paranoid. Husler really was out to get him. She had specific instructions from her boss, the regional Subway supervisor, to find fault with the store, she said in an interview.
“I was kind of his hit man,” she said, sipping an iced tea at a Starbucks in the Bay Area. Husler worked for the regional supervisor for nearly a year, she said, and she has come to regret the role she played in pushing a group of store owners out of their investments. The lightbulb moment with Tripathi, especially, gave her pause. “We’re ruining these people,” she said.
Subway is the largest fastfood company in the world by store count, with more than 24,000 restaurants in the United States alone. It got that way thanks in large part to entrepreneurial immigrants. Unlike at chains such as McDon
ald’s and Burger King, where many franchises are operated by investment firms, Subway owners are mostly individuals and families. The company’s cofounder, Fred DeLuca, made stores easy to open; most new franchisees are charged a $15,000 initial fee, compared with $45,000 at McDonald’s. In exchange, Subway operators must hand over more revenue than at many other chains — 8% of gross sales — while also agreeing to other fees and stipulations.
For half a century, the system worked to mutual advantage. Subway’s value hit $12.3 billion, and countless firstgeneration Americans bootstrapped their way to success, one footlong at a time.
By the time DeLuca died in 2015, though, the company was struggling. Rivals like Jimmy John’s and Quiznos had grown, and Subway’s spokesman, Jared Fogle, pleaded guilty to child sex and pornography charges. DeLuca’s sister, Suzanne Greco, took over as chief executive, inheriting a company that many felt had grown too fast and haphazardly. In 2016, for the first time ever, more Subway stores closed than opened. But while many franchisees shut down because of underperformance, others operating profitable locations began to feel targeted, too.
For many owners, Subway’s internal workings are a mystery. The chain, which is private, offers far less financial information than other global fastfood peers. In the most recent version of a disclosure document given to prospective franchisees, which is more than 600 pages long, the company notes that it can revise its rules “at any time during the term of your Franchise Agreement under any condition and to any extent.”
The document would be difficult for anyone to process. But Alexander Dembski, who trained many new Subway owners over a 34year career, estimated to Fortune in 1998 that 30 to 50% of the chain’s franchisees were immigrants and that more than a third of applicants scored poorly on proficiency tests in math and English.
Before his death, DeLuca was accused of using bullying tactics that left many operators struggling to recoup their investments, leading to lawsuits, regulatory runins, government investigations and constant complaints from franchisees. One of the most persistent areas of protest has involved a class of Subway managers known as development agents.
Subway parcels its vast network of stores into more than 100 regional fiefs. Each is overseen by a development agent, who recruits new franchisees, approves buyers for existing stores and sends inspectors — known as field consultants — to conduct monthly reviews. But usually, development agents are also franchisees themselves. When that is the case, they are both in charge of and competing with other store operators, and their own locations are inspected by people they hire.
These feel like conflicts of interest to many Subway owners — giving development agents the means and motivation to shut down competing stores and take over profitable ones by manipulating inspections. Many franchisees who have lost their restaurants say that they have recouped little of their original investments. Intervention from Subway’s headquarters in Connecticut is rare.
Don Fertman, Subway’s chief development officer and a veteran of the company for 38 years, said that owning restaurants helps give development agents “a better understanding of all aspects of owning a small business.” He said the company reviews the agents’ work and expects them to uphold ethical standards, dealing with violations “on a casebycase basis.”
Across the country, franchisees have lodged complaints and filed lawsuits. In West Virginia, Bhrugesh and Utpala Vyas ran three stores, two of them top performers in the territory, they said. In a 2017 filing in federal court in Connecticut, Utpala Vyas accused the local development agent, the man’s son and an inspector of conspiring to take over the stores by concocting “unreasonably harsh evaluations.”
A judge ruled against Vyas. Records from local health departments and Subway show that at least two of the stores are now coowned by the inspector and the development agent. “I feel very bad, and my blood is boiling,” Bhrugesh Vyas said. “This was our hardearned money.”
Fertman said that complaints like those Vyas filed are “unfounded” and that Subway “makes every effort” to help noncompliant franchisees improve. He added that the company is “in the business of selling sandwiches — not closing restaurants, not marking people out of compliance.”
“Our business development agents are wellrespected members of our business community,” he said. “And when we hear these allegations, I would say that they are false.” He said he was not aware of any exceptions.
For years, the Subway system’s opacity and aggressive pace of development — DeLuca once dreamed of opening 50,000 stores by 2017 — went hand in hand. The company encouraged stores to open within blocks of existing locations, with development agents often giving the established franchisees a choice: Operate the new restaurant themselves or compete with someone recruited by Subway. Franchisees, feeling pressured, sometimes took the first option.
“It was assumed that the stores would, eventually, become sustainable,” Tripathi said. An immigrant from India, he bought into Subway’s expansion in a major way. After two decades spent at companies like Jamba Juice and the Body Shop, opening Subway franchises was his chance to take charge. At one point, he owned 38 stores, and by 2015 he was among the largest franchisees in the East Bay.
That was when Greco took over Subway, and the company’s store count began to shrink. In the East Bay, Tripathi was under the jurisdiction of a development agent named Chirayu Patel, known as Akki. He oversaw a huge, choice territory that included most of Northern California and western Nevada. Patel also owned dozens of Subway stores.
In 2016, he convened a franchisee meeting in a Sacramento warehouse. He told everyone that Subway wanted to improve its strongest restaurants and shut down the weaker ones, according to Nikku Aulakh, a franchisee who was present.
She left the gathering alarmed. She and many fellow franchisees had been pushed for years to invest huge sums in new stores that were now struggling. Subway’s franchise contract forbids the company from unilaterally closing stores just because sales are weak. But franchisees can lose control of their restaurants for failing to meet Subway’s operating standards — violations cited by inspectors employed by development agents like Patel.
Aulakh said Patel eventually pressured her into closing or selling her four stores in Sacramento, after they received a slew of bad evaluations. “I would have liked to stay in business for another 10 to 15 years,” she said. “I wanted to make more money, but I had no other choice.”
Dozens of franchisees in the region decided to appeal to Greco for help. Tripathi was one of them. “There is a deep sense of morass within the franchisee community,” the group wrote in a 2016 letter. Soon after, they wrote again, asking that Greco “designate somebody impartial to look into the matter.” The franchisees said that they suspected Subway’s development agents of commissioning “unfair/biased/questionable evaluations” and forcing franchisees out “at a throwaway price.” They feared retaliation. “Needless to say, time is of the essence,” they wrote.
Greco did not respond, they said. (Subway said it always has “open lines for franchisees through multiple channels of communication.”) But Patel heard about the letter and was enraged, Husler said. He wanted all of the franchisees involved ejected from his region, she said. Husler recalled Patel instructing her: “Go in there and just throw your probe right into that food. It’s not going to make temperature, and you can mark them out of compliance.”
Subway is in the midst of an ambitious makeover campaign, hiring a firm that has worked with Tiffany & Co. and Saks Fifth Avenue, adding to its menu and stocking remodeled stores with new technology.
Since DeLuca’s death, the company has been on shaky footing. It was slower than many rivals to launch a digital loyalty program and mobile ordering options. Revenue fell to $10.4 billion last year, down 9.5% from 2015, according to the market research firm Technomic. In recent months, the chain has added a new chief information officer, a chief marketing officer and a North American vice president. Greco retired last year.
Subway’s store count has shrunk by more than 2,000 since 2015. “We have to look at each and every location and optimize our footprint accordingly,” said Fertman, Subway’s chief development officer. “We have to make sure, ultimately, that we have the right restaurants in the right locations.” Other executives have called it an “optimization” effort.
On the day after Memorial Day, Tripathi and his wife, Sadhana, stopped by one of the 10 Subways they still own, in an outdoor shopping mall in Orinda. The cashier at the restaurant cracked jokes with customers. Fans spun overhead. Every lightbulb shone.
The Tripathis said they fear they could lose yet more of their stores. They sued Subway and Patel in 2016 in California court, accusing the development agent of “using a variety of techniques including trumpedup and false inspection reports to justify terminating certain franchises.” Subway invoked the clause in the franchisee contract that requires disputes to be resolved in private arbitration in Connecticut. The Tripathis have filed an appeal for the case to proceed in California.
Tripathi, a trained engineer with a business degree, and his wife, who holds a doctorate in chemistry, said they were mostly able to read and understand the reams of legal documents produced by the conflict. Many of their fellow franchisees cannot, they said. “The reason we were fighting them is that we can,” he said.
But he and his wife are getting tired of the Subway system. “We worked so hard; we gave up our own careers,” she said. “We’ve been through so much, but it’s not worth it anymore.”